Analysis of GBP/USD 5M
GBP/USD bounced back on Wednesday, which is quite logical and natural. The British pound has already fallen by 1000 pips in the past two months, so it needs to enter a corrective phase to have the opportunity to continue its downward movement. Therefore, even though the pound did not have a lot of reasons to rise on Wednesday, it traded higher along with the euro and mostly due to technical factors. In the morning, the UK Services PMI was better than expected but it was lower than the previous reading. Therefore, this couldn't have been the reason why the pound rose by 50-60 pips during the European session.
There were no good entry points on Wednesday. At the beginning of the US trading session, GBP/USD reached the level of 1.2143 and the critical line, and the pair spent the rest of the day trading around it. There was one bounce from this area, and traders could try to execute this signal. However, the signal turned out to be false, and the pair only moved in the right direction by 20 pips. Nevertheless, at least traders could set a Stop Loss to breakeven. Volatility was quite high, so short positions could be opened around the 1.2143-1.2160 area. However, today, volatility may sharply decrease, and the pound will continue to overcome the critical line so that the second correction does not end "in just 5 minutes."
COT report:
According to the latest report on GBP/USD, the non-commercial group closed 300 long positions and opened 17,700 short ones. Thus, the net position of non-commercial traders decreased by another 18,000 contracts in a week. The net position indicator has been steadily rising over the past 12 months, but it has been firmly decreasing over the past two months. The British pound is also losing ground. We have been waiting for many months for the sterling to reverse downwards. Perhaps GBP/USD is at the very beginning of a prolonged downtrend. At least in the coming months, we do not see significant prospects for the pound to rise.
The British pound has surged by a total of 2,800 pips from its absolute lows reached last year, which is an enormous increase. Without a strong downward correction, a further upward trend would be entirely illogical (if it is even planned). We don't rule out an extension of an uptrend. We simply believe that a substantial correction is needed first, and then we should assess the factors supporting the US dollar and the British pound. A correction to the level of 1.1843 would be sufficient to establish a fair equilibrium between the two currencies. The non-commercial group currently holds a total of 84,700 longs and 69,000 shorts. The bears have been holding the upper hand in recent months, and we believe this trend will continue in the near future.
Analysis of GBP/USD 1H
On the 1H chart, GBP/USD quickly ended its long-awaited bullish correction but may start a new one. The pound, as before, is poised to go downward. So, we do not believe that its decline in 2023 is over. The only thing is that we would have preferred to see a stronger correction than what we ultimately saw. However, the market decided not to take a long break and immediately led the pair towards fair values. And these values are below the current levels.
As of October 5, we highlight the following important levels: 1.1760, 1.1874, 1.1927-1.1965, 1.2052, 1.2188, 1.2269, 1.2349, 1.2429-1.2445, 1.2520, 1.2605-1.2620, 1.2693. Senkou Span B (1.2265) and Kijun-sen (1.2154) lines can also be sources of signals. Signals can be "bounces" and "breakouts" of these levels and lines. It is recommended to set the Stop Loss level to break-even when the price moves in the right direction by 20 pips. The Ichimoku indicator lines can move during the day, which should be taken into account when determining trading signals. The illustration also includes support and resistance levels that can be used to lock in profits from trades.
On Thursday, there are no interesting reports or events lined up in the UK. Several Federal Reserve officials (secondary events in the current circumstances) will speak and the US will release a standard report on jobless claims, which rarely triggers a market reaction. We expect weak movements, but the pair will try to overcome the Kijun-sen line.
Description of the chart:
Support and resistance levels are thick red lines near which the trend may end. They do not provide trading signals;
The Kijun-sen and Senkou Span B lines are the lines of the Ichimoku indicator, plotted to the 1H timeframe from the 4H one. They provide trading signals;
Extreme levels are thin red lines from which the price bounced earlier. They provide trading signals;
Yellow lines are trend lines, trend channels, and any other technical patterns;
Indicator 1 on the COT charts is the net position size for each category of traders;
Indicator 2 on the COT charts is the net position size for the Non-commercial group.
